Purchasing Power Parity and Why I Am Interested. Purchasing Power Parity and Why I Am Interested
Purchasing Power Parity (PPP) is a compelling research topic for two reasons. First, it is an interesting theoretical tool used for measuring and forecasting national and international economic cost approximations within the global economic system. It accomplishes this objective by looking at the foreign exchange rate between two currencies and determining the variance in price for a similar product. Finally, PPP is also used as a tool to simplify how we look at the complex array of global exchanges behind the creation and distribution of a product globally.
I am interested in conducting further research on PPP due to academic curiosity. Our assigned readings highlighted the perils of relying on it as an accurate theoretical measurement tool and an indicator of cross approximation across markets. PPP does not consider regional disparities in materials, quality, and production that are present when the same product is produced in myriad markets across the globe. Overall, having a better understanding of PPP and its strengths and weaknesses as theoretical measurement tool will enhance my comprehension of systemic economic data interactions in the future.
Explanation of Purchasing Power Parity
PPP is a theoretical metric that attempts to measure national or regional economic status or forecast economic trends. Specifically, it is an exchange rate theory that proposes that equivalent or similar products in different nations should have a comparable price when looking at the foreign currency exchange rate between the two nations’ domestic currencies (Satterlee, 2018). PPP offers a straightforward way of looking at price similarities and differences between the same or comparable products across the globe. Overall, it allows for an easier way of seeing how changes in exchange rates correspond to the changes in the price of a similar product between nations.
As I briefly touched on earlier, PPP does not consider differences in quality, materials, and production processes that are inherent in the global marketplace (Satterlee, 2018). With that in mind, it is important to remember two things. First, PPP is one of many economic indicators that should be taken into consideration when measuring an economic status or attempting to accurately forecast economic trends. Finally, PPP is not always useful in trying to understand imbalances in exchange rates.
